Datamonitor‘s new report, Retail
Revolution*, finds that the UK has led the evolution of private label brands from
generic, lower quality goods to higher quality own brands that compete directly
with main brands. Tesco emerges as the leader in European retailing in terms of
exploiting private label in order to drive gross margins.

There has been a general
increase in the penetration of private label goods across Europe and in the
US as retailers have used these products to increase their gross margins, offer
value for money to consumers and build their company brand. Initially the UK
was the biggest user of private label goods with penetration rates exceeding
50% for some retailers and categories. However, in Europe the penetration of
private label is considerably lower than in the UK, although at present continental
European retailers are increasing the amounts of private label in their portfolios.
This is expected to continue for the next two to five years.

Gross
margin, private label share and market share of the topthree retailers by
country (% value), 1999
 
Gross
margin
Private
label share
Combined
market share
France
21.1
18.8
66.6%
Germany
14.8
17.5
45.1%
Italy
20.0
13.2
24.3%
Netherlands
23.4
11.1
86.3%
Spain
19.5
27.6
27.3%
Sweden
19.4
7.5
96.4%
UK
26.8
44.8
39.3%
US
27.8
22.5
34.4%
Average
21.6
20.4
52.5%

Source: Datamonitor

Responding to increasing
levels of price competition, retailers have sought to increase the share of
private label goods in order to benefit from the higher gross margin that these
products provide. For the UK, where private label penetration is the highest,
there is a clear association among the top three retailers between having a
high average margin and a high private label share. Further, private label shares
are very low in Sweden, the Netherlands and Italy, indicating a major opportunity
for private label manufacturers in these countries.

Private label quality
is increasing

Piers Berezai, Datamonitor food industry analyst comments: ” Instead of
retailers offering basic, generic private labels, there has been a shift towards
greater quality own label goods. This trend is particularly strong in the UK,
but which is now also occurring in France and Germany. Retailers are targeting
the middle price segment with their private labels, offering goods that are
of comparable quality to known brands and that are competitive on price. In
Germany this tactic is being used not only to increase margins, and to brand
stores, but also to move away from offering the lowest prices in the market,
which has previously been the main characteristic of the German market. Retailers
have also become increasingly aware of the role that private label goods play
in communicating the core values of a brand message to consumers. Private label
goods are increasingly being used to convey the message regarding the price
and quality positioning of the store itself, as well as possible ethical views
that the retailer may hold. In addition, private labels are also becoming brands
in their own right, such as Sainsbury’s Novon, and are often promoted individually.”

Haircare Declines, Pet
Food & Packet Foods Increase Share

Many UK retailers are reducing the amount of private label in their assortments
as a result of category management practices identifying that there were too
many private label goods in portfolios for the product mix to be optimal. Overall
there has been an average annual decline in private label share in the UK of
0.6% from 1997 to 1999.

There have been divergent
trends between private label categories. In particular, the share of private
label in personal care has been decreasing, reflecting the increased importance
of the main brands of companies such as L’Oréal and Procter & Gamble
in this sector. Haircare has seen a very strong decline as a result of this
with an average annual decline of 9.7% from 1997 to 1999. Strong growth has
been seen in pet food and packet goods, which have seen an average annual increase
of 3.3% and 4.1% respectively between 1997 and 1999.

The major retailers will
seek to follow the standard set by Tesco

Figure 1 shows the relationship between average margins and private label share
for the market-leading retailer in each of the eight countries covered. Tesco
emerges as the clear leader in European retailing in terms of exploiting private
label in order to drive gross margins. There is a clear incentive for the other
retailers to attempt to move from their current positioning towards that of
Tesco by increasing private label share.

Figure
1: Key data on the leading retailers by country (% value), 1999

Source: Datamonitor

*’Retail Revolution’, £2995. Datamonitor Sales 020 7675 7261